UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 2, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21970
--------------------------------------
ACTEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0097724
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
955 East Arques Avenue
Sunnyvale, California 94086-4533
(Address of principal executive offices) (Zip Code)
(408) 739-1010
(Registrant's telephone number, including area code)
--------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Number of shares of Common Stock outstanding as of August 11,
2000: 23,908,503.
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ----------------------
Jul. 2, Jul. 4, Apr. 2, Jul. 2, Jul. 4,
2000 1999 2000 2000 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues ................................. $ 55,544 $ 41,619 $ 50,666 $ 106,210 $ 82,457
Costs and expenses:
Cost of revenues .......................... 20,949 16,238 19,208 40,157 32,232
Research and development .................. 8,888 8,064 8,351 17,239 16,511
Selling, general, and administrative ...... 11,827 12,904 11,529 23,356 23,345
Amortization of goodwill and other
acquisition-related intangibles ......... 1,544 339 1,023 2,567 829
Restructure and other charges ............. -- 1,963 -- -- 1,963
Purchased in-process research and
development ............................... 5,558 -- -- 5,558 --
--------- --------- --------- --------- ---------
Total costs and expenses ............ 48,766 39,508 40,111 88,877 74,880
--------- --------- --------- --------- ---------
Income from operations ....................... 6,778 2,111 10,555 17,333 7,577
Interest income and other, net ............... 1,859 721 1,305 3,164 1,462
Gain on sale of Chartered Common stock ....... 28,329 -- -- 28,329 --
--------- --------- --------- --------- ---------
Income before tax provision and equity in net
loss of equity method investee ............... 36,966 2,832 11,860 48,826 9,039
Equity in net (loss) of equity method investee (356) -- (123) (479) --
Tax provision ................................ 16,498 906 3,638 20,136 2,892
--------- --------- --------- --------- ---------
Net income ................................... $ 20,112 $ 1,926 $ 8,099 $ 28,211 $ 6,147
========= ========= ========= ========= =========
Net income per share:
Basic ..................................... $ 0.86 $ 0.09 $ 0.36 $ 1.23 $ 0.29
========= ========= ========= ========= =========
Diluted ................................... $ 0.77 $ 0.09 $ 0.32 $ 1.09 $ 0.27
========= ========= ========= ========= =========
Shares used in computing net income per share:
Basic ..................................... 23,263 21,511 22,767 23,015 21,480
========= ========= ========= ========= =========
Diluted ................................... 26,186 22,454 25,467 25,907 22,620
========= ========= ========= ========= =========
</TABLE>
ACTEL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Jul. 2, Jan. 2,
2000 2000
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................... $ 27,644 $ 4,939
Short-term investments .................................................. 143,239 102,201
Accounts receivable, net ................................................ 27,896 22,753
Inventories, net ........................................................ 26,761 25,324
Deferred income taxes ................................................... 21,378 20,622
Prepaid expenses and other current assets ............................... 2,245 2,045
--------- ---------
Total current assets .............................................. 249,163 177,884
Property and equipment, net ................................................ 10,762 12,564
Investment in Chartered Semiconductor ...................................... -- 37,619
Other assets, net .......................................................... 48,184 31,144
--------- ---------
$ 308,109 $ 259,211
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 17,169 $ 15,374
Accrued salaries and employee benefits .................................. 9,265 6,884
Other accrued liabilities ............................................... 2,966 2,887
Income taxes payable .................................................... 14,669 4,025
Deferred income ......................................................... 45,695 39,896
--------- ---------
Total current liabilities ......................................... 89,764 69,066
Deferred tax liability .................................................. 1,057 11,515
--------- ---------
Total liabilities ................................................. 90,821 80,581
========= =========
Commitments and contingencies
Shareholders' equity:
Common stock ............................................................ 24 22
Additional paid-in capital .............................................. 137,360 110,146
Accumulated earnings .................................................... 80,612 52,401
Note receivable from officer ............................................ (368) --
Accumulated other comprehensive (loss) income ........................... (340) 16,061
--------- ---------
Total shareholders' equity ........................................ 217,288 178,630
--------- ---------
$ 308,109 $ 259,211
========= =========
</TABLE>
<PAGE>
ACTEL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Jul. 2, Jul. 4,
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net income .............................................................. $ 28,211 $ 6,147
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 6,538 4,763
Non-cash portion of restructure and other charges ..................... -- 3,057
Equity in net loss of equity method investee .......................... 479 --
Gain on sale of Chartered Semiconductor stock ......................... (28,329) --
Purchased in-process research and development ......................... 5,558 --
Changes in operating assets and liabilities:
Accounts receivable ................................................. (5,143) (641)
Inventories ......................................................... (1,437) 1,398
Other current assets ................................................ (187) (154)
Accounts payable, accrued salaries and employee benefits, and other
accrued liabilities ............................................... 7,767 (4,479)
Deferred income ..................................................... 5,799 385
Deferred income taxes ............................................... (822) 1,115
--------- ---------
Net cash provided by operating activities ............................... 18,434 11,591
--------- ---------
Investing activities:
Purchases of property and equipment ..................................... (2,169) (3,357)
Purchases of available-for-sale securities .............................. (154,935) (85,117)
Sales of available-for-sale securities .................................. 113,840 80,453
Other assets ............................................................ 24 (2,232)
Proceeds from sale of Chartered Semiconductor common stock .............. 39,009 --
Cash acquired in Prosys acquisition ..................................... 43 --
Note receivable from GateField .......................................... (1,000) (8,000)
--------- ---------
Net cash used in investing activities ................................... (5,188) (18,253)
--------- ---------
Financing activities:
Issuance of note receivable from officer ................................ (368) --
Sale of common stock .................................................... 9,827 3,465
--------- ---------
Net cash provided by financing activities ............................... 9,459 3,465
--------- ---------
Net decrease in cash and cash equivalents .................................. 22,705 (3,197)
Cash and cash equivalents, beginning of period ............................. 4,939 13,947
--------- ---------
Cash and cash equivalents, end of period ................................... $ 27,644 $ 10,750
========= =========
<PAGE>
Supplemental disclosures of cash flow information:
Cash paid for taxes ..................................................... $ 10,371 $ 7,533
Supplemental disclosures of non-cash transactions:
Issuance of common stock in conjunction with Prosys acquisition ......... $ 7,526 --
Conversion of $8.0 million GateField Promissory Note into 1,230,769 shares of
GateField common stock.
Conversion of 300,000 shares of GateField Series C Preferred Stock with an
adjusted cost basis of $1.3 million into 200,000 shares of GateField common
stock.
</TABLE>
1. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements of Actel
Corporation ("Actel" or "the Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, these financial statements do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on Form
10-K for the year ended January 2, 2000.
The results of operations for the three and six months ended July 2,
2000, are not necessarily indicative of results that may be expected for the
entire year ending December 31, 2000.
2. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which, as amended by SFAS 137
and 138, is required to be adopted in years beginning after June 15, 2000. The
Company is currently evaluating the impact that the adoption of SFAS 133 will
have on future results of operations or financial position.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation." FIN 44 clarifies the application of Accounting Principles
Board Opinion No. 25 for certain issues relating to stock compensation. FIN 44
is effective July 1, 2000, but certain conclusions in it cover specific events
that occur after either December 15, 1998, or January 12, 2000. To the extent
that FIN 44 covers events occurring during the period after December 15, 1998,
or January 12, 2000, but before the effective date of July 1, 2000, the effects
of applying FIN 44 are recognized on a prospective basis from July 1, 2000. The
Company does not expect FIN 44 to have a material effect on its financial
position or results of operations.
In May 2000, the EITF reached a consensus on EITF Issue
00-14,"Accounting for Certain Sales Incentives." This consensus provides
guidance on the recognition, measurement, and income statement classification
for sales incentives offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. This consensus must be adopted no later than
October 1, 2000. The Company does not expect the adoption of this consensus to
have a material impact on its financial position or results of operations.
In July 2000, the EITF reached a consensus on EITF Issue
00-10,"Accounting for Shipping and Handling Fees and Costs." This consensus
provides guidance on the recognition and income statement classification for
shipping and handling costs billed to customers. The Company does not expect the
adoption of this consensus to have a material impact on its financial position
or results of operations.
3. Equity Accounting
In light of Actel's investments in and agreements with GateField
Corporation ("GateField") including common stock, a $1.0 million convertible
promissory note from GateField, and marketing and licensing agreements with
GateField, Actel accounts for its investments in GateField under the equity
equity method of accounting. Actel began accounting for its equity interest in
GateField under the equity method of accounting during 1999. During the quarter
ended July 2, 2000, the Company converted an $8 million promissory note into
1,230,769 shares of GateField common stock and also converted 300,000 shares of
GateField Series C Preferred Stock into 200,000 shares of GateField common
stock. The Company also paid GateField $1 million during the quarter in exchange
for a $1 million Convertible Note bearing interest at 6.25% and ultimately
convertible into 190,476 shares of GateField common stock. At July 2, 2000, the
Company owned 1,622,298 shares of GateField common stock.
The impact of using equity accounting was a $652,000 charge to the
Company's net income for the first quarter of fiscal 2000 ($529,000 included in
amortization of goodwill and $123,000 included in equity in net losses of equity
method investee) and $984,000 ($628,000 included in amortization of goodwill and
$356,000 in net losses of equity method investee) for the second quarter of
2000. Assuming conversion of the convertible promissory note due from GateField,
the aggregate total of GateField common stock owned by Actel would be 1,812,774
shares, or 28.6% of the total common stock of GateField.
GateField common stock, which is listed on the National Association of
Security Dealers ("NASD") Over-The-Counter Bulletin Board, closed at $5.08 on
June 30, 2000.
On May 31, 2000, GateField Corporation and Actel Corporation announced
the signing of a definitive agreement to merge. In the merger, Actel would pay
cash consideration of $5.25 per share of GateField Common Stock not already
owned by Actel (approximately 4.5 million shares). Actel would also assume all
outstanding GateField stock options. The merger is subject to several
conditions, including approval by GateField's stockholders at a special meeting.
<PAGE>
4. Inventories
Inventories consist of the following:
Jul. 2, Jan. 2,
2000 2000
------------ ------------
(in thousands)
Inventories:
Purchased parts and raw materials............. $ 5,281 $ 3,363
Work-in-process............................... 9,523 8,366
Finished goods................................ 11,957 13,595
------------ ------------
$ 26,761 $ 25,324
============ ============
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value). Given the volatility of the market for the
Company's products, the Company makes inventory provisions for potentially
excess and obsolete inventory based on backlog and forecast demand. However,
such backlog demand is subject to revisions, cancellations, and rescheduling.
Actual demand will inevitably differ from such backlog and forecast demand, and
such differences may be material to the financial statements. Excess inventory
increases handling costs and the risk of obsolescence, is a non-productive use
of capital resources, and delays realization of the price and performance
benefits associated with more advanced manufacturing processes.
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share":
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ----------------------
Jul. 2, Jul. 4, Apr. 2, Jul. 2, Jul. 4,
2000 1999 2000 2000 1999
--------- --------- --------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Basic:
Average common shares outstanding ............ 23,263 21,511 22,767 23,015 21,480
Shares used in computing net income per
share ...................................... 23,263 21,511 22,767 23,015 21,480
========= ========= ========= ========= =========
Net income ................................... $ 20,112 $ 1,926 $ 8,099 $ 28,211 $ 6,147
========= ========= ========= ========= =========
Net income per share ......................... $ 0.86 $ 0.09 $ 0.36 $ 1.23 $ 0.29
========= ========= ========= ========= =========
Diluted:
Average common shares outstanding ............ 23,263 21,511 22,767 23,015 21,480
Net effect of dilutive stock options - based
on the treasury stock method .............. 2,923 943 2,700 2,892 1,140
--------- --------- --------- --------- ---------
Shares used in computing net income per share 26,186 22,454 25,467 25,907 22,620
========= ========= ========= ========= =========
Net income ................................... $ 20,112 $ 1,926 $ 8,099 $ 28,211 $ 6,147
========= ========= ========= ========= =========
Net income per share ......................... $ 0.77 $ 0.09 $ 0.32 $ 1.09 $ 0.27
========= ========= ========= ========= =========
</TABLE>
6. Comprehensive Income
The components of comprehensive income, net of tax, in thousands, are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- ----------------------
Jul. 2, Jul. 4, Apr. 2, Jul. 2, Jul. 4,
2000 1999 2000 2000 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Income ................................... $ 20,112 $ 1,926 $ 8,099 $ 28,211 $ 6,147
Unrealized gain/(loss) on available-for-sale
securities ................................ (5,738) (86) 6,515 777 (151)
Less reclassification adjustment for (gains) /
losses included in net income ............. (17,189) -- 11 (17,178) --
--------- --------- --------- --------- ---------
Other Comprehensive Income / (Loss) .......... (22,927) (86) 6,526 (16,401) (151)
--------- --------- --------- --------- ---------
Total Comprehensive Income / (Loss) .......... $ (2,815) $ 1,840 $ 14,625 $ 11,810 $ 5,996
========= ========= ========= ========= =========
</TABLE>
Accumulated other comprehensive income presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
gain (loss) on available-for-sale securities.
7. Patent Infringement
Except as described below, there are no pending legal proceedings of a
material nature to which the Company is a party or of which any of its property
is the subject. There are no such legal proceedings known by the Company to be
contemplated by any governmental authority.
Unisys v. Actel and QuickLogic (CV C-00 01114 WDB)
On March 29, 2000, Unisys brought suit in the United States District
Court for the Northern District of California, San Jose Division, against the
Company seeking monetary damages and injunctive relief based on Actel's alleged
infringement of four patents held by Unisys. In the lawsuit, Unisys alleges that
the Company has infringed and continues to infringe four Unisys patents and
seeks damages, costs and attorneys fees, as well as an injunction prohibiting
further infringement. On May 11, 2000, the Company filed its answer and
counterclaim in which it denies that it has infringed or is infringing any of
the asserted patents, and seeks a judicial declaration that the asserted patents
are invalid and unenforceable.
The Company believes that it has meritorious defenses to the claims
asserted by Unisys and intends to defend itself vigorously in this matter. After
consideration of the information currently known, the Company does not believe
that the ultimate outcome of this case will have a materially adverse effect on
Actel's business, financial condition, or results of operations, although no
assurance to that effect can be given. The foregoing is a forward-looking
statement subject to all of the risks and uncertainties of a legal proceeding,
including the discovery of new information and unpredictability as to the
ultimate outcome.
Periodically, the Company is made aware that technology used by the
Company may infringe intellectual property rights held by others. During the
second quarter of fiscal 2000, the Company continued to hold discussions with
several third parties regarding potential patent infringement issues, including
two semiconductor manufacturers with significantly greater financial and
intellectual property resources than Actel. The Company has made adequate
provision for the estimated settlement costs of claims for alleged infringement
prior to the balance sheet date. Subject to the foregoing, management does not
believe any pending disputes, including those described in this paragraph, are
likely to have a materially adverse effect on the Company's financial condition,
results of operations, or liquidity. The foregoing is a forward-looking
statement. While management believes that reasonable resolution will occur,
there can be no assurance that these claims will be resolved or that the
resolution of these claims will not have a materially adverse effect on future
results of operations or require changes in the Company's products or processes.
In addition, management's evaluation of the likely impact of these pending
disputes could change in the future based upon new information learned by
management.
8. Prosys Technology Acquisition
In June 2000 the Company completed the acquisition of Prosys
Technology, a developer of embedded FPGA Intellectual Property cores, in a
transaction accounted for as a purchase.
In connection with the acquisition, the Company accrued for the cash
payment to be made to Prosys of $6,900,000 in cash and issued 220,518 shares of
Actel common stock, at a value of $34.13 per share, in exchange for all
outstanding common shares and options of Prosys stock. The price per share of
common stock was based on an average of five days closing market prices for
Actel common stock during the period of June 1, 2000 through June 7, 2000 when
the agreement to acquire Prosys was announced. The Company assumed $144,000 of
liabilities and incurred $88,000 of acquisition costs. The Company also
converted the existing Prosys options to Actel options. These options were
exercisable and were estimated to equal $9,864,000 (using the Black-Scholes
Option Pricing Model).
Thus, total consideration for the Prosys acquisition was valued at $24,522,000.
In accordance with the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations", all identifiable assets were assigned a
portion of the total consideration on the basis of their respective fair values.
The consideration was allocated as follows based on the valuation report of an
independent valuation specialist:
In-process research and development $ 5,558,000
Acquired work-force 273,000
Patent applications 349,000
Cash & other current assets 57,000
Deferred tax liability (249,000)
Goodwill and other intangibles 18,534,000
A portion of the purchase price has been allocated to acquired
in-process research and development ("IPRD"). IPRD was identified and valued
through extensive interviews, analysis of data provided by Prosys concerning
developmental products, their stage of development, the time and resources
needed to complete them, and associated risks. The income approach, which bases
the value of an asset on future earnings capacity of the asset, was utilized in
valuing the IPRD. This approach values an asset based on the future cash flows
that could be potentially generated by the asset over its estimated useful life.
The future cash flows are discounted to their present value utilizing a discount
rate (25%) that would provide sufficient return to a potential investor to
estimate the value of the subject asset. The estimated completion date of the
technology is late 2000. The present value of the cash flows over the life of
the asset is summed to equal the estimated value of the asset. The IPRD, valued
at $5,558,000 using the income approach, was charged to expense upon the closing
of the acquisition.
The value of the assembled workforce was estimated using a cost
approach. This approach identifies the employees that would require significant
cost to replace and train. This analysis then estimates the fully burdened costs
(locating, interviewing, and hiring) attributed to each employee. These costs
are summed up and tax-effected to estimate the value of the estimated workforce.
The Company expects to amortize the value assigned to the acquired workforce of
$273,000 on a straight-line basis over an estimated remaining useful life of six
months.
As of the valuation date, it was assumed that there was some value
attributable to the Prosys patent applications. To value the patent
applications, the relief from royalty methodology was utilized. This methodology
assumes that the value of the asset equals the amount a third party would pay to
use the asset and capitalize on the related benefits of the asset. Therefore, a
revenue stream for the asset is estimated, and then an appropriate royalty rate
is applied to the forecasted revenue to estimate the pre-tax income associated
with the asset. The pre-tax income is then tax-effected to estimate the
after-tax net income associated with the asset. Finally, the after-tax net
income is discounted to the present value using an appropriate rate of return
(25%) that considers both the risk of the asset and the associated cash flow
estimates. The Company expects to amortize the value assigned to the patent
applications of $349,000 on a straight-line basis over an estimated useful life
of five years.
Goodwill, which represents the excess of the purchase price of an investment in
an acquired business over the fair value of the underlying net identifiable
assets, is amortized on a straight-line basis over its estimated useful life of
five years.
9. Subsequent Events
On August 2, 2000, GateField Corporation and Actel Corporation
purchased a convertible promissory note receivable from GateField in the
principal amount $2.75 million. The note is convertible into GateField common
stock at $5.25 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
All forward-looking statements contained in this Quarterly Report on
Form 10-Q, including all forward-looking statements contained in any document
incorporated herein by reference, are made pursuant to the safe harbor
provisions of the Public Securities Litigation Reform Act of 1995. Words such as
"anticipates," "believes," "estimates," "expects," intends," "plans," "seeks,"
and variations of such words and similar expressions are intended to identify
the forward-looking statements. Additionally all forward-looking statements are
based on current expectations and projections about the semiconductor industry
and programmable logic market, and assumptions made by the Company's management
that reflect its best judgment based on other factors currently known by
management, but they are not guarantees of future performance. Accordingly,
actual events and results may differ materially from those expressed or forecast
in the forward-looking statements due to the risk factors identified herein or
for other reasons. The Company undertakes no obligation to update any
forward-looking statement contained or incorporated by reference in this
Quarterly Report on Form 10-Q.
Results of Operations
Net Revenues
Net revenues for the second quarter of fiscal 2000 were a record $55.5
million, which represents an increase of 10% compared with the Company's net
revenues for the first quarter of fiscal 2000 and an increase of 33% compared
with the Company's net revenues for the second quarter of fiscal 1999. Net
revenues for the first six months of fiscal 2000 were $106.2 million, which
represents an increase of 29% compared with the Company's net revenues for the
first six months of fiscal 1999 of $82.5 million.
The increase in sequential quarterly net revenues resulted from a 5%
increase in the overall average selling price ("ASP") of field programmable gate
arrays ("FPGAs"), due primarily to the strength of the Company's new product
families, and an increase of 5% in unit shipments. The increase in net revenues
for the first six months of fiscal 2000 compared to the same period one year ago
resulted from a 29% increase in unit shipments along with ASPs remaining
essentially flat during the same time frame.
As is typical in the semiconductor industry, the average selling prices
of the Company's products generally decline over the lives of such products. To
increase revenues, the Company seeks to increase unit sales of existing
products, principally by reducing prices, and to introduce and sell new
products. No assurance can be given that these efforts will be successful.
Gross Margin
Gross margin for the second quarter of fiscal 2000 was a record 62.3%
of net revenues, compared with 62.1% for the first quarter of fiscal 2000 and
61.0% for the second quarter of fiscal 1999. Gross margin for the first six
months of fiscal 2000 was 62.2% of net revenues, compared with 60.9% of net
revenues for the first six months of fiscal 1999. The improved gross margin was
primarily driven by improved yields, especially on newer products; and wafer
cost reductions.
The Company seeks to improve gross margin by reducing costs. These cost
reduction activities include improving wafer yields, negotiating price
reductions with suppliers, increasing the level and efficiency of its testing
and packaging operations, achieving economies of scale by means of higher
production levels, and increasing the number of die produced per wafer by
shrinking the die size of its products. There can be no assurance that these
efforts will be successful. The ability of the Company to shrink the die size of
its FPGAs is dependent on the availability of more advanced manufacturing
processes. Because of the custom steps involved in manufacturing antifuse-based
FPGAs, the Company typically obtains access to new manufacturing processes later
than its competitors using standard manufacturing processes.
Research and Development
Research and development expenditures for the second quarter of fiscal
2000 were $8.9 million, or 16% of net revenues, compared with $8.4 million, or
17% of net revenues, for the first quarter of fiscal 2000 and $8.1 million, or
19% of revenues, for the second quarter of fiscal 1999. The absolute spending
increase in the second quarter of fiscal 2000 compared to the first quarter of
fiscal 2000 was primarily driven by the acquisition in June 2000 of Prosys
Technology ("Prosys"), an embedded FPGA intellectual property (IP) developer.
The spending increase in the second quarter of fiscal 2000 compared to the
second quarter of fiscal 1999 was primarily driven by the previously mentioned
Prosys acquisition, along with increased spending which was needed to drive the
acceleration of new product introduction. Spending as a percentage of revenues
decreased from the prior quarter and the second quarter of fiscal 1999 due to
revenue growth being larger than the absolute spending increases.
Research and development expenditures for the first six months of
fiscal 2000 were $17.2 million, or 16% of net revenues, compared with $16.5
million, or 20% of net revenues, for the first six months of fiscal 1999. This
represents an increase of 4% in research and development expenditures, which was
more than offset by the 29% increase in net revenues in fiscal 2000 compared to
the same time period in fiscal 1999. The absolute spending increase was driven
by the Prosys acquisition along with the increased spending for new product
development.
Selling, General, and Administrative
Selling, general, and administrative expenses for the second quarter of
fiscal 2000 were $11.8 million, or 21% of net revenues, compared with $11.5
million, or 23% of net revenues, for the first quarter of fiscal 2000 and $12.9
million, or 31% of net revenues, for the second quarter of fiscal 1999. Selling,
general, and administrative expenses for the first six months of fiscal 2000
were $23.4 million, or 22% of net revenues, compared with $23.3 million, or 28%
of net revenues, for the first six months of fiscal 1999.
Selling, general, and administrative expenses for the second quarter of
fiscal 2000 were slightly higher ($0.3M) than the first quarter of fiscal 2000
driven by increased sales bonus cost associated with the higher revenue in the
second quarter of fiscal 2000 compared to the first quarter of fiscal 2000.
However, as a percentage of revenue, selling, general, and administrative
expenses decreased due to the increase in net revenues of 10% in the second
quarter of fiscal 2000 compared to the first quarter of fiscal 2000. The
decrease of $1.1 million in spending in the second quarter of fiscal 2000
compared to the same quarter one year ago was due to increased spending in the
earlier period for legal expenses, namely, the accrual of a reserve for the
estimated costs of settlement of claims for alleged patent infringement.
Increased selling expenses for sales conferences, bonuses, and distributor
termination costs in the earlier period also contributed to the decrease. The
decrease in spending as a percent of net revenue during the first six months of
fiscal 2000 (22%) compared to the same time frame in fiscal 1999 (28%) was
driven by the 29% increase in net revenues in fiscal 2000 compared to the same
period in fiscal 1999.
Acquired In-Process Research and Development Expenses
In June 2000 the Company completed the acquisition of Prosys
Technology, a developer of embedded FPGA Intellectual Property cores, in a
transaction accounted for as a purchase.
In connection with the acquisition, the Company paid Prosys $6,900,000
in cash and issued 220,518 shares of Actel common stock, at a value of $34.13
per share, in exchange for all outstanding common shares and options of Prosys
stock. The price per share of common stock was based on an average of five days
closing market prices for Actel common stock during the period of June 1, 2000
through June 7, 2000 when the agreement to acquire Prosys was announced. The
Company assumed $144,000 of liabilities and incurred $88,000 of acquisition
costs. The Company also converted the existing Prosys options to Actel options.
These options were exercisable and were estimated to equal $9,864,000 (using the
Black-Scholes Option Pricing Model). Thus, total consideration for the Prosys
acquisition was valued at $24,522,000.
In accordance with the provisions of Accounting Principles Board
Opinion No. 16, "Business Combinations", all identifiable assets were assigned a
portion of the total consideration on the basis of their respective fair values.
The consideration was allocated as follows based on the valuation report of an
independent valuation specialist:
In-process research and development $ 5,558,000
Acquired work-force 273,000
Patent applications 349,000
Cash & other current assets 57,000
Deferred tax liability (249,000)
Goodwill 18,534,000
A portion of the purchase price has been allocated to acquired
in-process research and development ("IPRD"). IPRD was identified and valued
through extensive interviews, analysis of data provided by Prosys concerning
developmental products, their stage of development, the time and resources
needed to complete them, and associated risks. The income approach, which bases
the value of an asset on future earnings capacity of the asset, was utilized in
valuing the IPRD. This approach values an asset based on the future cash flows
that could be potentially generated by the asset over its estimated useful life.
The future cash flows are discounted to their present value utilizing a discount
rate (25%) that would provide sufficient return to a potential investor to
estimate the value of the subject asset. The estimated completion date of the
technology is late 2000. The present value of the cash flows over the life of
the asset is summed to equal the estimated value of the asset. The IPRD, valued
at $5,558,000 using the income approach, was charged to expense upon the closing
of the acquisition.
The value of the assembled workforce was estimated using a cost
approach. This approach identifies the employees that would require significant
cost to replace and train. This analysis then estimates the fully burdened costs
(locating, interviewing, and hiring) attributed to each employee. These costs
are summed up and tax-effected to estimate the value of the estimated workforce.
The Company expects to amortize the value assigned to the acquired workforce of
$273,000 on a straight-line basis over an estimated remaining useful life of six
months.
As of the valuation date, it was assumed that there was some value
attributable to the Prosys patent applications. To value the patent
applications, the relief from royalty methodology was utilized. This methodology
assumes that the value of the asset equals the amount a third party would pay to
use the asset and capitalize on the related benefits of the asset. Therefore, a
revenue stream for the asset is estimated, and then an appropriate royalty rate
is applied to the forecasted revenue to estimate the pre-tax income associated
with the asset. The pre-tax income is then tax-effected to estimate the
after-tax net income associated with the asset. Finally, the after-tax net
income is discounted to the present value using an appropriate rate of return
(25%) that considers both the risk of the asset and the associated cash flow
estimates. The Company expects to amortize the value assigned to the patent
applications of $349,000 on a straight-line basis over an estimated useful life
of five years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is amortized on a straight-line basis over its estimated
useful life of five years.
Amortization of Goodwill, Other Acquisition-Related Intangibles and
Other Acquisition-Related Expenses
Amortization of goodwill and other acquisition-related expenses for the
second quarter of fiscal 2000 was $1.5 million compared with $1.0 million for
the first quarter of fiscal 2000 and $0.3 million for the second quarter of
fiscal 1999. Amortization of goodwill and other acquisition-related intangibles
for the first six months of fiscal 2000 was $2.6 million compared to $0.8
million for the first six months of fiscal 1999. The increase in the second
quarter of fiscal 2000 compared with the prior quarter was due to a Prosys
goodwill amortization charge in the second quarter of $0.4 million. The increase
in the second quarter of fiscal 2000 compared with the second quarter of fiscal
1999 was due primarily to Prosys goodwill amortization charge ($0.4 million),
AutoGate Logic, Inc. ("AGL") goodwill amortization charges of $0.4 million and
the equity method of accounting charge in GateField Corporation ("GateField") of
$0.6 million. The increase in the first six months of fiscal 2000 compared to
the first six months of fiscal 1999 of $1.8 million was due primarily to the AGL
goodwill amortization charges ($0.8m), Prosys goodwill amortization charge ($0.4
million), GateField equity method of accounting charges of $1.2 million, offset
by the Texas Instrument goodwill amortization charge of $0.4 million that
occurred in the first six months of fiscal 1999, but did not occur in 2000
because it was fully amortized during fiscal 1999.
Gain on sale of Chartered common stock
During the second quarter of fiscal 2000 the Company sold all 515,000
shares of Chartered Semiconductor common stock it owned for a one-time gain of
$28.3 million.
Interest Income and Other Income and Expenses
Interest income and other income expenses was $1.9 million for the
second quarter of fiscal 2000 compared to $1.3 million in the previous quarter
and $3.2 million for the first six months of fiscal 2000 compared to $1.5
million during the first six months of fiscal 1999. The increase was driven
primarily by increased cash, cash equivalents, and short term investments
available for investing by the Company.
Tax Provision
The Company's effective rate for the three and six months ended June
30, 2000 was 32% and 30%, respectively, excluding the effect of certain
non-recurring merger related charges and investment related gains. The effective
tax rate including such charges and gains for the three and six months ended
June 30, 2000 was 45% and 42%, respectively. The Company's effective tax rate
for the three and six months ended June 30, 1999 was 32%. The increase in the
Company's effective tax rate in the second quarter of fiscal 2000 when compared
to the prior quarter was due primarily to a slower projected growth in research
and development credits and tax exempt interest. The effective tax rates are
based on the estimated annual tax rate in compliance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." This rate differs
from the federal statutory rate due primarily to state income taxes (net of
federal benefit), the benefits of research and development credits, tax exempt
income, and recognition of certain deferred tax assets subject to valuation
allowances as of January 2, 2000.
Liquidity and Capital Resources
At the end of the second quarter of fiscal 2000, the Company's cash,
cash equivalents, and short-term investments were $170.9 million, compared with
$107.1 million at the beginning of fiscal 2000. This included cash and cash
equivalents of $27.6 million at then end of the second quarter compared with
$4.9 million at the beginning of fiscal 2000. The amount of cash and cash
equivalents increased principally because of the sale of the Chartered
Semiconductor common stock ($39.0 million cash proceeds), cash provided by
operations, and cash received from employee stock option transactions.
During the first six months of 2000, the Company generated $18.4
million of cash from operating activities. The Company used $5.2 million of cash
in investing activities during the first six months of 2000, including $41.1
million of net purchases of available-for-sale securities, the purchase of a
$1.0 million Promissory note from GateField and purchases of property and
equipment of $2.2 million. These investing purchases were partially offset by
$39.0 million of proceeds from the sale of Chartered Semiconductor common stock.
Financing activities during the first six months of 2000 provided $9.5 million
and was primarily generated from proceeds from sales of common stock under
employee option and stock purchase plans.
The Company believes that existing cash, cash equivalents, and
short-term investments, together with cash from operations, will be sufficient
to meet its cash requirements for the next four quarters. A portion of available
cash may be used for investment in or acquisition of complementary businesses,
products, or technologies.
The Company has a line of credit with a bank that provides for
borrowings not to exceed $5,000,000. The agreement contains covenants that
require the Company to maintain certain financial ratios and levels of net
worth. As of July 2, 2000, the Company was in compliance with the covenants for
the line of credit. Borrowings against the line of credit bear interest at the
bank's prime rate. There were no borrowings against the line of credit at July
2, 2000. The line of credit, which expires in May 2001, may be terminated by
either party upon not less than thirty days' prior written notice.
Wafer manufacturers are increasingly demanding financial support from
customers in the form of equity investments and advance purchase price deposits,
which in some cases are substantial. If the Company requires additional
capacity, it may be required to incur significant expenditures to secure such
capacity.
The Company believes that the availability of adequate financial
resources is a substantial competitive factor. To take advantage of
opportunities as they arise, or to withstand adverse business conditions should
they occur, it may become prudent or necessary for the Company to raise
additional capital. The Company intends to continue monitoring the availability
and cost of potential capital resources, including equity, debt, and off-balance
sheet financing arrangements, and may consider raising additional capital on
terms that are acceptable to the Company. There can be no assurance that
additional capital will become available on acceptable terms, if at all.
Other Factors Affecting Future Operating Results
The Company's operating results are subject to general economic
conditions and a variety of risks characteristic of the semiconductor industry
(including booking and shipment uncertainties, wafer supply fluctuations, and
price erosion) or specific to the Company, any of which could cause the
Company's operating results to differ materially from past results. For a
discussion of such risks, see "Risk Factors" in Part I of the Company's Annual
Report on Form 10-K for 1999, which is incorporated herein by this reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of July 2, 2000, the Company's investment portfolio consisted
primarily of corporate bonds, floating rate notes, and federal and municipal
obligations. The primary objectives of the Company's investment activities are
to preserve principal, meet liquidity needs, and maximize yields. To meet these
objectives, the Company invests only in high credit quality debt securities with
average maturities of less than two years. The Company also limits the
percentage of total investments that may be invested in any one issuer.
Corporate investments as a group are also limited to a maximum percentage of the
Company's investment portfolio.
The Company's investments are subject to interest rate risk. An
increase in interest rates could subject the Company to a decline in the market
value of its investments. These risks are mitigated by the ability of the
Company to hold these investments to maturity. A hypothetical 100 basis point
increase in interest rates would result in a decrease of approximately
$1,368,000 in the fair value of the Company's available-for-sale securities.
The Company purchases a portion of the wafers it uses in production
from Japanese suppliers, which are denominated in Japanese yen. An adverse
change in the foreign exchange rate would affect the price the Company pays for
a portion of the wafers used in production over the long term. The Company
attempts to mitigate its exposure to risks from foreign currency fluctuations by
purchasing forward foreign exchange contracts to hedge firm purchase commitments
denominated in foreign currencies. Forward exchange contracts are short term and
do not hedge purchases that will be made for anticipated longer-term wafer
needs. An adverse change of 10% in exchange rates would result in a decline in
income before taxes of approximately $952,000 based on projected yen denominated
wafer purchases for the next four quarters.
All of the potential changes noted above are based upon sensitivity
analysis performed on the Company's financial position at July 2, 2000. Actual
results may differ materially.
<PAGE>
Additional Quarterly Information
The following table presents certain unaudited quarterly results for
each of the eight quarters in the period ended July 2, 2000. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
accruals) have been included in the amounts stated below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended January 2, 2000.
These quarterly operating results are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Jul. 2, Apr. 2, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3, Oct. 4,
2000 2000 2000 1999 1999 1999 1999 1998
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share amounts)
Statements of Income Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ................................. $55,544 $50,666 $46,042 $43,162 $41,619 $40,838 $40,174 $38,628
Gross profit ................................. 34,595 31,458 28,546 26,503 25,381 24,844 24,377 23,383
Income from operations ....................... 6,778 10,555 7,175 7,492 2,111 5,466 5,535 5,012
Net income ................................... $20,112 $ 8,099 $ 5,823 $ 5,668 $ 1,926 $ 4,221 $ 4,118 $ 3,837
Net income per share:
Basic ..................................... $ 0.86 $ 0.36 $ 0.26 $ 0.26 $ 0.09 $ 0.20 $ 0.20 $ 0.18
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................... $ 0.77 $ 0.32 $ 0.24 $ 0.25 $ 0.09 $ 0.19 $ 0.19 $ 0.18
======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing net income per share:
Basic ..................................... 23,263 22,767 22,048 21,748 21,511 21,347 21,091 21,449
======= ======= ======= ======= ======= ======= ======= =======
Diluted ................................... 26,186 25,467 24,015 23,003 22,454 22,673 22,201 21,724
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------------
Jul. 2, Apr. 2, Jan. 2, Oct. 3, Jul. 4, Apr. 4, Jan. 3, Oct. 4,
2000 2000 2000 1999 1999 1999 1999 1998
------- ------- ------- ------- ------- ------- ------- -------
As a Percentage of Net Revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues ................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit ................................. 62.3 62.1 62.0 61.4 61.0 60.8 60.7 60.5
Income from operations ....................... 12.2 20.8 15.6 17.4 5.1 13.4 13.8 13.0
Net income ................................... 36.2 16.0 12.6 13.1 4.6 10.3 10.3 9.9
</TABLE>
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Except as described below, there are no pending legal proceedings of a
material nature to which the Company is a party or of which any of its property
is the subject. There are no such legal proceedings known by the Company to be
contemplated by any governmental authority.
Unisys v. Actel and QuickLogic (CV C-00 01114 WDB)
On March 29, 2000, Unisys brought suit in the United States District
Court for the Northern District of California, San Jose Division, against the
Company seeking monetary damages and injunctive relief based on Actel's alleged
infringement of four patents held by Unisys. In the lawsuit, Unisys alleges that
the Company has infringed and continues to infringe four Unisys patents and
seeks damages, costs and attorneys fees, as well as an injunction prohibiting
further infringement. On May 11, 2000, the Company filed its answer and
counterclaim in which it denies that it has infringed or is infringing any of
the asserted patents, and seeks a judicial declaration that the asserted patents
are invalid and unenforceable.
The Company believes that it has meritorious defenses to the claims
asserted by Unisys and intends to defend itself vigorously in this matter. After
consideration of the information currently known, the Company does not believe
that the ultimate outcome of this case will have a materially adverse effect on
Actel's business, financial condition, or results of operations, although no
assurance to that effect can be given. The foregoing is a forward-looking
statement subject to all of the risks and uncertainties of a legal proceeding,
including the discovery of new information and unpredictability as to the
ultimate outcome.
Periodically, the Company is made aware that technology used by the
Company may infringe intellectual property rights held by others. During the
second quarter of fiscal 2000, the Company continued to hold discussions with
several third parties regarding potential patent infringement issues. The
Company has made adequate provision for the estimated settlement costs of claims
for alleged infringement prior to the balance sheet date. Subject to the
foregoing, management does not believe any pending disputes, including those
described in this paragraph, are likely to have a materially adverse effect on
the Company's financial condition, results of operations, or liquidity. The
foregoing is a forward-looking statement. While management believes that
reasonable resolution will occur, there can be no assurance that these claims
will be resolved or that the resolution of these claims will not have a
materially adverse effect on future results of operations or require changes in
the Company's products or processes. In addition, management's evaluation of the
likely impact of these pending disputes could change in the future based upon
new information learned by management.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of the Company was held on May 19,
2000. At the Annual Meeting, the Company's shareholders (i) elected directors to
serve until the next Annual Meeting of Shareholders and until their successors
are elected and (ii) ratified the appointment of Ernst & Young LLP as the
Company's independent auditors for the fiscal year ending December 31, 2000. The
Company's shareholders declined to approve a proposal to amend and restate the
Company's 1986 Incentive Stock Option Plan in order to increase the number of
shares reserved for issuance under the Plan by 5,000 and extend the term of the
Plan from March 2004 to February 2010.
The vote for nominated directors was as follows:
Nominee For Withheld Broker Nonvotes
-------------------------- ---------- -------- ---------------
John C. East.............. 16,768,110 413,189 0
Jos C. Henkens............ 16,773,920 407,379 0
Jacob S. Jacobsson........ 16,772,496 408,803 0
Frederic N. Schwettmann... 16,771,830 409,469 0
Robert G. Spencer......... 16,773,930 407,369 0
The vote on approval of the Company's 1986 Incentive Stock Option Plan
as amended and restated to increase the number of shares reserved for issuance
under the Plan by 5,000 and to extend the term of the Plan from March 2004 to
February 2010 was as follows:
For Against Abstain Broker Nonvotes
---------- ---------- ------- ---------------
5,582,090 7,465,923 19,618 4,113,668
The vote on ratifying the appointment of Ernst & Young LLP was as
follows:
For Against Abstain Broker Nonvotes
---------- ---------- ------- ---------------
17,164,490 9,478 7,331 0
Item 5. Other Information
The Company also has two convertible promissory notes from
GateField, one for $1.0 million that was executed on May 31, 2000 and the
other one for $2.75 million that was executed on August 2, 2000. Both notes
are convertible into GateField common stock at $5.25 per share. If the
Company converted both of these notes into GateField common stock, it would
own, in total, 2,336,583 shares.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits filed on June 19, 2000 with Current Report on
8-K are filed as part of, or incorporated by reference into, this Report on Form
10-Q:
Exhibit Number Description
-------------- ----------------------------------------------------
2.1 Agreement and plan of reorganization by and between
Actel Corporation and Prosys Technology, Inc.,
Jung-Cheun "Frank" Lien, Sheng "Jason" Feng, Chung
Sun, Eddy Huang, and Nan Horng Yeh dated as of June
2, 2000 (filed as Exhibit 10.1 to Actel Corporation's
Current Report Form 8-K (File No. 0-21970), exhibit
no. 10.1, on June 2, 2000, and incorporated herein by
this reference).
2.2 Amended and Restated Agreement and Plan of Merger by
and among Actel Corporation, GateField Acquisition
Corporation, and GateField Corporation dated as of
May 31, 2000 filed as Exhibit 10.2 to Actel
Corporation's Current Report Form 8-K (File No.
0-21970), exhibit no. 10.2, on June 2, 2000, and
incorporated herein by this reference).
(b) Reports on Form 8-K
On June 19, 2000, the Company filed a Current Report on 8-K relating to
the Company's acquisition of Prosys Technology, Inc. and agreement to acquire
GateField Corporation.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTEL CORPORATION
Date: August 14, 2000 /s/ Henry L. Perret
---------------------------------
Henry L. Perret
Vice President of Finance
and Chief Financial Officer
(as principal financial officer
and on behalf of Registrant)
